A 50% drop will happen for one reason and one reason alone! Appraisers!!! Say an initial decrease of 10-20% in home values hits over the next few years driven by natural fluctuations, a large portion of the 80% of non traditional loans that have been issued experiencing trouble and lack of demand caused by a declining market. Not to mention higher interest rates and the fed telling lenders they should make lending practices more stringent. Once prices have dropped 20% the market will change. Few people will be looking to sell because they just lost 20% of their homes value and it is no longer in their best interest. Also the people who choose to treat real estate as a home and not investment do not add to the stability of the market because they do not factor into the pricing of homes say 6 months after purchase. After a drop of 20% the market will stagnate for a while and the only people who will be selling are distressed owners and banks. This will prompt low ball offers from the people on the sidelines further driving down prices. If these low ball offers persist of the course of a few years this could drive the price greatly over time. Now comes the appraiser. The only thing they have to base home values off of are the comparable sales which a majority of will be distressed sales/REO’s. Depending on how bad the stagnation is they may not have many comps to choose from. Not to mention most appraisers fear getting sued and loosing their license so they will implement the “C.Y.A.” rule and go conservative on their prices and use a negative time adjustment factor. After all the market is declining! I believe that a 10-20% correction is just the start. Then we will be having the argument that the comparables don’t reflect my homes value, which is true as long as you aren’t forced to sell.

PS: I love Appraisers! They are an interesting group of people most of which I know go into business for themselves because they have a “problem” with voicing their opinions!